What Does Fairness Have to Do with the Price of Eggs?

The starting point of business ethics is contractual: I agree to provide a fair product (or service), and you agree to pay me a fair price.

After that, the arguments start.

What's a "fair" price?

When we're on the provider side of the equation, we generally want the price to be as high as possible; as consumers, we want the price to be as low as possible.

In an effort to maximize sales and minimize costs, some producers are willing to go very low indeed.

And what's a "fair" product?

At the very least, it would be safe.

I've been following, as I'm sure many of you have been too, the ongoing story of the recall of eggs from two leading U.S. producers, Wright County Egg and Hillandale Farms. Since 13 August, when the recall began, more than half a billion eggs have been recalled, and since this spring, some 1500 cases of salmonella have been linked to affected eggs.

Today's New York Times carries an article by William Neuman that outlines some of the findings from federal inspections at the Iowa egg farms: "Barns infested with flies, maggots and scurrying rodents, and overflowing manure pits" were among the appetizing details reported.

"Both companies said that they had acted quickly to correct problems and were continuing to cooperate with regulators," the article claims.

But the problems reported as so egregious that management at Wright County Egg and Hillandale Farms must have been aware of the situation. For example, at Wright County Egg, inspectors found "pits beneath laying houses where chicken manure was piled four to eight feet high." Not something you're likely to, um, overlook.

Wright County Egg is owned by Austin ("Jack") DeCoster, who is no stranger to run-ins with federal and state regulations. As reported by Mary Clare Jalonick for the Huffington Post, fines into the millions of dollars have been assessed against DeCoster for health and safety violations at his Maine operations as well as labor violations at his Iowa "farms" (full article here).

I use quotation marks around "farm" because what I think of as a farm bears little resemblance to the industrial complexes that are, for example, Wright County Egg.

In the meantime, the FDA has released a new "draft guideline" for the prevention of salmonella in shell eggs (many egg producers sell shell eggs to consumers and also send eggs to "breaking plants" where the eggs are pasteurized -- which kills the salmonella bacteria -- and sold in liquid form, usually to food manufacturers). Will these new guidelines prevent another huge salmonella outbreak?

As long as there are producers out there like DeCoster -- who seems to think of fines as merely another cost of doing business -- I suspect the FDA's efforts will be insufficient.

Egg production can be done humanely and safely, but .... it will come at a higher price. That seems fair.

What's Going On at J&J?

Back at the dawn of time, when I was in business school, Johnson & Johnson was held up as the gold standard for handling product recalls, for its swift response when cyanide-laced Tylenol capsules in a handful of Chicago-area stores caused seven consumer deaths in 1982. The company immediately pulled every single Tylenol off every single store shelf in the United States.

As I have written before (here), there was some surprise at the time that a company would react so dramatically, with so little (apparent) consideration for immediate profit concerns. The long-term effect was terrific consumer loyalty.

But that loyalty seems to have been taking a beating lately.

"More than two years after the Food and Drug Administration began receiving complaints about the failure of a hip replacement implant made by the DePuy Orthopaedics units of Johnson & Johnson, the company said Thursday that it was recalling two kinds of hip implants, " reports Natasha Singer in today's New York Times. [Full article here]

In addition, as Singer also noted, the FDA earlier this week sent the company a warning letter, claiming that DePuy was marketing one device without "marketing approval or clearance ... which is a violation of the law" and marketing another "for unapproved uses".

Earlier this year [see my blogpost on that subject here], two years of complaints from consumers about moldy-smelling bottles finally led J&J to recall an assortment of OTC products from its McNeil Consumer Health Care unit (including ... Tylenol!)

Earlier this week, J&J recalled millions of its Acuvue contact lenses sold in Japan and several other countries. As noted by the Associated Press, that was the ninth recall of a J&J consumer product in a year.

Singer quotes a health-care investment banker: "No. 1, is there a systemic issue at J&J? No. 2, is this [the hip-replacement recall] reflective of that systemic issue? And, No. 3, is there more to come?"

That banker isn't the only one asking that question. I am too, and I'll bet a lot of other consumers are as well.

The recalls are also having an immediate effect on the bottom line.

In Katharine Hobson's late July Wall Street Journal blogpost, she reported that the McNeil recalls "cut $200 million from the [second] quarter’s sales and will pare an estimated $600 million from sales for all of 2010."

But -- as was the case in 1982 -- profits can recover. Trust? Not so much.

If the CEO Does It, Does That Make It OK?

Ethics is easy when the stakes are low, or when doing the right thing makes you look good: You find your neighbor's wallet on the sidewalk, and return it to him promptly.

It gets more difficult as the stakes go up.

The most recent case is that of Mark Hurd, who was until last Friday chief executive officer of Hewlett-Packard.

As reported by numerous news outlets (click here for Colin Barr's article for Fortune / CNN), Hurd resigned following an accusation of sexual harassment of a marketing contractor with whom he developed a personal relationship. In the course of its internal investigation, H-P determined that Hurd had not violated its sexual harassment policy, but violated its "standards of business conduct" policy, having repeatedly filed inaccurate expense reports in amounts ranging from $1,000 to $20,000, apparently in an effort to keep the relationship secret (Hurd is married).

Hurd reportedly first offered to repay the improperly expensed items, but the board insisted that he step down.

In the words of CNET's Erica Ogg, "Hurd's resignation marks a stunning end to what had been by most accounts a wildly successful five years at the helm of what is now the largest computer company in the world, measured by total revenues." H-P share prices dropped nearly 10% in late trading on news of Hurd's departure.

In an email to the New York Times, which was first reported by UK-based theregister.co, Oracle's chief executive officer Larry Ellison blasted the H-P decision as "the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago."

"In losing Mark Hurd, the H.P. board failed to act in the best interest of H.P.’s employees, shareholders, customers and partners," Mr. Ellison wrote. "The H.P. board admits that it fully investigated the sexual harassment claims against Mark and found them to be utterly false."

Well, maybe, Mr. Ellison. But what about those pesky "inaccuracies" in expense reporting? Such behavior is generally considered to be a for-cause firing offense. Or is it only a firing offense if you're a junior-level employee? Doesn't this remind you of President Nixon's remark to David Frost that if the president does it, it's not illegal?

Not to mention that a junior-level employee with falsified expense reports wouldn't receive a nice little severance payment of more than $12 million....

How Would You Define "Conflict of Interest"?

... That's what I thought. Me, too.

Today's New York Times carries an excellent, if depressing, piece by Gretchen Morgenson: "Exotic Deals Put Denver Schools Deeper in Debt".

It turns out that not-as-financially-savvy-as-they-thought-they-were individuals weren't the only ones targeted for bizarre financial instruments in the runup to the Wall Street implosion.

According to Morgenson's article, early in 2008, the Denver Board of Education, seeking to fill a $400 million hole in its pension fund, turned to JP Morgan Chase for help.

The bankers said that the school system could raise $750 million in an exotic transaction that would eliminate the pension gap and save tens of millions of dollars annually in debt costs -- money that could be plowed back into Denver's classrooms, starved in recent years for funds.

Yeah, I know. It smells, now. But then (the deal closed just weeks after the failure of Bear Stearns), well, let's just say that there were still a lot of house-flippers out there, and the Denver school board, as Morgenson puts it, "essentially made the same choice some homeowners make: opting for a variable-rate mortgage that offered lower monthly payments, with the risk that they could rise, instead of a conventional, fixed-rate mortgage that offered larger, but unchanging, monthly payments."

To date, the school system has apparently paid at least $25 million more in interest and other fees than it had originally expected. While they would like to renegotiate, to undo the deal completely, Denver would have to pay a huge "termination" fee.

The deal is getting extra attention in part because Michael Bennet, the superintendent of schools who, with the system's operating officer, pushed hard for the deal, is now a United States senator from Colorado.

But I found this paragraph the most telling, and the most depressing:

A spokesman at JPMorgan, which led the Denver deal, declined to comment. Royal Bank of Canada, which acted as the school system's independent adviser even though it participated in the debt transaction, declined to comment. Denver school officials said that they had agreed to sign a conflict waiver with Royal Bank of Canada. [Emphasis added]

Even though it participated in the debt transaction?!?! How could one ignore that level of conflict of interest?

I am not going to throw all the blame for this at Royal Bank of Canada, however. It would be easy to say, Oh those horrible greedy bankers, and leave it at that.

Sadly, there seems to be a fair amount of responsibility to spread around.

For example, unlike many school superintendents, now-Senator Bennet had extensive private-sector financial experience. Morgenson reports that "Mr. Bennet handled investments and structured financial deals for the Anschutz Investment Company, a private concern owned by the billionaire Philip Anschutz that has a stakes in telecommunications and oil." The district's chief operating officer (and currently superintendent), Thomas Boasberg, also had private-sector experience, having been a mergers and acquisitions deal maker for a telecommunications company.

Morgenson further reports that, according to then-members of the board of education, "the bankers' presentations for the 2008 debt deal outline its risks only in broad terms... [and] had not discussed problems in the variable-rate debt market that arose the previous year -- a development that would have alerted them to troubles they might have had securing a manageable rate on the debt they were refinancing."

Of course, if we're looking at responsibility, it's worth asking those same board members, How is it that it was OK with you that "for years, the school system had not met its required annual pension payments to ensure a fully funded plan"?

If You Must Recall, Please Do So Loudly

Let's say that I am a pet food manufacturer, and some of my products are being linked to outbreaks of salmonella (among people feeding my products to their pets). I announce a recall.

How loudly do you want me to announce that?

Pretty damn loudly, I'd think.

Today's New York Times carries an article by William Neuman, reporting on a frozen-mouse recall. Apparently frozen mice are popular among reptile owners: just thaw and feed (I like snakes and other reptiles, but I am suppressing considerable squeamishness here. May I just say, Ewwww.).

MiceDirect, based in Cleveland GA, sells mice (from "small pinkies" to "jumbo adults"), rats ("pinkies" to "mammoth") and chicks. (Sorry, I'm having another squeam moment here. Deep breath.)

The website currently carries a "Recall Notice: May 2009 - July 23, 2010" hot link right at the top of its home page, but that has not been the case for long.

According to the Times report, "The company's recall notice was not prominently posted on its Web site until Thursday. And neither the company's site nor the F.D.A.'s site gave clear instructions on what to do with mice that customers still had." (emphasis added)

A reptile owner, who "bought 10,500 mice from MiceDirect early this year", when contacted by the Times said that "he had not heard about the recall until a reporter called him Wednesday."

Salmonella linked to MiceDirect was first reported in Great Britain in August 2008, and in the United States in January of this year. A spokesperson for the Centers for Disease Control said that British officials informed the CDC of the outbreaks in 2009; the FDA (which regulates pet food companies) was also informed.

An FDA spokesperson, on the other hand, said that her agency was "checking to see if it had a record of the 2009 contact from the CDC" and was not told of the American outbreak until May of this year. In early July, officials of both agencies conducted an inspection at MiceDirect, and the FDA informed the company on 21 July that tests of the product and plants had found salmonella. Two days later, the company agreed to a recall.

Don't you think that MiceDirect should have taken a proactive stance after the first, British reports of salmonella?

So do I, especially in light of the fact that, to date, "more than 400 have people have fallen ill there, about two-thirds of them ...children under 10." An epidemiologist at the Health Protection Agency's Center for Infections noted that "although shipments of tainted mice were halted last year, people continue to get sick there.... perhaps because snake owners, unaware of the dangers, continue to use mice kept in their freezers."

Since pet owners have the mice delivered directly to their doors, the company has their contact information. They should have reached out to them immediately, loudly, and persistently.

BigFood -- The Gift That Keeps Giving, Alas

Assuming, of course, that you write a blog about ethics in business. Or the lack thereof.

I've written twice already about food rules (here and here) and about the ways major companies like Kellogg's, ConAgra, and McDonald's skirt the minimal rules that are out there in their marketing to children.

There had been some indication that the Food & Drug Administration was finally getting tough, but according to today's New York Times, the progress has stalled. William Neuman writes,

A report to Congress from several federal agencies — expected to include strict nutritional definitions for the sorts of foods that could be advertised to children — is overdue, and officials say it could be months before it is ready. Some advocates fear the delay could result in the measure being stripped of its toughest provisions.

While I'm fine with arguing about the specifics of the proposed new rules (the "level for saturated fats would be set so low it would exclude peanut butter," for example), I'm dismayed to see how this administration is caving to big business.

My favorite quote from the business side was from Dan Jaffee, executive vice president for government relations for the Association of National Advertisers:

The proposal was extraordinarily restrictive and would virtually end all food advertising as it’s currently carried out to kids under 18 years of age.

And that would be so terrible, Mr. Jaffee, why?

It's not the 10-year-olds, after all, who are out there in the supermarkets buying Froot Loops (12 grams of sugar per serving, compared to proposed limit of 8 grams). It's their parents. So why do I look for stronger government controls rather than tell the parents to do their job and practice saying, "NO!"

First of all, let's be realistic here. I'm not suggesting that Froot Loops be banned. Nor am I suggesting that all advertising be banned. But poor eating habits and childhood obesity are serious problems, and I think that we should be helping parents address these issues, not throwing up libertarian roadblocks all over the place.

Are American parents all spineless wusses? Hardly. But many of them are tired. They are picking their battles and caving because of the "Please, Mommy, Pleeeeeeeeeeeeeeeease" factor, and the "If-you-don't-I'll-have-a-temper-tantrum-right-here-in-the-store" factor (I pulled those stunts myself as a child.).

And why are the children pulling these stunts? Because marketers know exactly how to play on children's credulity (I still remember the disappointment of realizing that "Sea Monkeys" -- aka brine shrimp -- didn't look like the cartoon images on the back of my comic book) and tastes (the bolder and brighter the colors, the more alluring).

Moreover, even if the advertising were limited only to children's television programming, it might be easier for parents to control their children's exposure. But it isn't. It's everywhere. It's in movies (hello, product placement and tie-ins!); it's in magazines and billboards; it's on the television screens in doctors' waiting rooms, for crying out loud.

Advertising directly to children (defined as under 12) is limited in many EU countries, and forbidden in Norway and Sweden, and in the province of Quebec. That's not a reason why the US should do the same ... but it's not a reason to oppose restrictions or a ban either.

Let's give parents real help to raise a generation of healthy kids.

Why Would You Treat the Honest as Though They Were Dishonest...

...instead of simply firing the @$$ of the dishonest?

The first time I heard about this latest corporate hoop, I laughed -- how ludicrous, I thought.

The second time, I thought, Blog post!

Even with "family-friendly" companies, it is now apparently commonplace to ask new employees to provide marriage certificates and "proof" that the marriage is still active, if they want to sign up for health-care benefits for their spouses. (For children's coverage, birth certificates are required, but apparently not proof that the child is still around.)

Clearly, there were people out there gaming the system in one way or another, getting coverage for those who weren't entitled to such coverage. (And people wonder why I'm in favor of national health insurance. Single-payer, too.)

It seems to me that if such gaming were so serious, the solution is to let employees know that lying about beneficiaries and their relationships to same is a firing offense.

You catch 'em out, you fire 'em.

Sadly, it's not the first time that I've found corporations -- which are usually quick enough to fire without cause (a.k.a. massive layoffs) -- unwilling to step up and fire for cause.

In a previous life, when I joined one company and asked about company credit cards, I was told, "Oh we don't do that anymore. We used to have them, but some of the field reps abused the privilege, so they were all taken away."

In other words, the honest were punished as well as the dishonest.

I know that the corporations will argue that it's because of our increasingly litigious society: that it's easier to pile on extra hoops for everyone to jump through than to risk lawsuits for an unfair dismissal.

So here again you have the situation where the honest are treated as though they were dishonest.

Easier maybe, but hardly more ethical.